Leading Independent Investment Research, Morningstar, Inc.

Morningstar

Leading Independent Investment Research

Morningstar, Inc.

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. 

Morningstar provides data on more than 500,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 16 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries, with more than $180 billion in assets under advisement or management as of June 30, 2015. We have operations in 27 countries.

Download the Morningstar Fact Sheet : http://corporate.morningstar.com/US/documents/MarketingFactSheets/AboutMorningstarFactsheet.pdf

Thematic (Sector/Industry)

Australia Construction materials / Thematic (Sector/Industry)

Australia’s November housing approvals were surprisingly strong, with 17.1% growth on the previous corresponding period, or pcp, to 22,532 units. Despite this strength, approvals for the full calendar year are still tracking to decline around 5% and we forecast approvals and completions to decline by 9% in 2018. With some cost inflation, we forecast new residential construction spend, which stems from housing approvals, to decline around 6% to AUD 61.3 billion in 2018. Offsetting this weakness, we expect improving infrastructure investment to drive 3% annual growth in total construction spending over the next two years. We maintain our fair value estimates for building materials companies under our coverage-- <a href="https://www.smartkarma.com/entities/20166" target="_blank" data-smartkarma-citation="entities:20166:1">Adelaide Brighton Ltd (ABC AU)</a>, <a href="https://www.smartkarma.com/entities/1487" target="_blank" data-smartkarma-citation="entities:1487:1">Boral Ltd (BLD AU)</a>, <a href="https://www.smartkarma.com/entities/17380" target="_blank" data-smartkarma-citation="entities:17380:1">CSR Ltd (CSR AU)</a>, <a href="https://www.smartkarma.com/entities/2726" target="_blank" data-smartkarma-citation="entities:2726:1">Brickworks Ltd (BKW AU)</a>, <a href="https://www.smartkarma.com/entities/10937" target="_blank" data-smartkarma-citation="entities:10937:1">James Hardie Industries Cdi (JHX AU)</a>, <a href="https://www.smartkarma.com/entities/663" target="_blank" data-smartkarma-citation="entities:663:1">Gwa Group Ltd (GWA AU)</a>, and <a href="https://www.smartkarma.com/entities/22929" target="_blank" data-smartkarma-citation="entities:22929:1">FLETCHER BUILDING LTD (FBU AU)</a>--and see the sector as overvalued.November’s approvals strength stemmed entirely from apartments, up a robust 35.8% on the pcp, seasonally adjusted. Detached dwellings posted a more modest increase of 0.7% on the pcp to 10,654 units. The month-tomonth numbers can be extremely volatile, so looking at the three-month average can smooth things out. For the three months to November, detached house approvals were running 2.9% higher than the pcp, in line with recent trends. The rolling three-month average for multiunit dwellings was showing year-over-year declines of 19% to 20% until September, but suddenly jumped in October, and by November was up 11.4% over the prior year.The sharp rebound in late 2017 puts us at risk of being too pessimistic, but we’re not ready to change our long-term view. Approvals have been over 200,000 for four years running, well above the long-run average and likely owing to a shortage in housing that accumulated after the financial crisis and the sharp rise in Australian population since. But we believe this shortage has largely been addressed, and we anticipate the need for new housing to taper going forward.Recent data on housing turnover, finance commitments, and house prices has anchored our view approvals are set to fall, especially in apartments. The latest figures for the September quarter showed established house sales down 20% from the June quarter and 24% versus the prior year. That was the sharpest year-over-year drop in seven years and the sharpest month-on-month fall since March 2008. That sounds somewhat shrill and it’s important to recognise there have been several double-digit declines in turnover on a quarter-over-quarter basis during this strong bull market in house prices; for example, turnover declined in the first quarter of 2016 when the banking regulator, Australian Prudential Regulation Authority, or APRA, introduced the 10% speed limit on lending to investors, and volumes and prices subsequently rebounded. But the recent sharp drop in turnover is nevertheless a red flag. The December quarter turnover figure will be a very important clue as to whether this was just a pause in the ongoing housing bull market, or if it marks a change in trend.Finance commitments have also slowed as APRA has tightened the screws. Total financing commitments to housing rose by 4.4% in the September quarter over the prior year. While this might seem reasonable, it has slowed from the 9.3% average annual growth in financing that took place over the four years between the start of 2012 and the end of 2015 as home prices and construction boomed.Now, there was a pick up during the September quarter of finance for new purchases and construction, with lending to new construction up 12.5% year over year, indicating there is some steam left in the new construction market. But we are not yet convinced it will see a return to the steady 15% growth of 2014 that drove the apartment approval boom. APRA’s monthly banking statistics show housing loan balances did tick up in October and November, growing 0.46% and 0.54% month over month, respectively (5.6% and 6.6% annualised) after averaging just 0.4% (5% annualised) since July; but we see this as mostly seasonality. The fourth quarter is typically the strongest. Against the prior year, growth in housing loans slowed to 6.3% in November, down from 7.1% growth in 2016 and early 2017. The key message is the data does not suggest a sudden reacceleration in lending.Finally, the Australian Bureau of Statistics', or ABS’, eight capital city weighted average median house price index declined by 0.2% in the September quarter versus the prior quarter. This could prove to be just a blip--there was a similar fall in the first quarter of 2016, when we saw a similar sharp drop in house transfers. But given the drop in turnover and slowdown in financing, it looks like a longer period of weakness is ahead. CoreLogic reports prices were flat in October and November, and declined 0.3% month on month in December.Overall, this confluence of factors makes us think it is premature to be upgrading our expectations for residential approvals in 2018, despite the recent positive news.Analyst: Lincoln Valentine

Australia’s November housing approvals were surprisingly strong, with 17.1% growth on the previous corresponding period, or pcp, to 22,532 units. Despite this strength, approvals for the full calendar year are still tracking to decline around 5% and we forecast approvals and completions to decline by 9% in 2018. With some cost inflation, we forecast new residential construction spend, which stems from housing approvals, to decline around 6% to AUD 61.3 billion in 2018. Offsetting this weakness, we expect improving infrastructure investment to drive 3% annual growth in total construction spending over the next two years. We maintain our fair value estimates for building materials companies under our coverage-- Adelaide Brighton Ltd (ABC AU), Boral Ltd (BLD AU), CSR Ltd (CSR AU), Brickworks Ltd (BKW AU), James Hardie Industries Cdi (JHX AU), Gwa Group Ltd (GWA AU), and FLETCHER BUILDING LTD (FBU AU)--and see the sector as overvalued.November’s approvals strength stemmed entirely from apartments, up a robust 35.8% on the pcp, seasonally adjusted. Detached dwellings posted a more modest increase of 0.7% on the pcp to 10,654 units. The month-tomonth numbers can be extremely volatile, so looking at the three-month average can smooth things out. For the three months to November, detached house approvals were running 2.9% higher than the pcp, in line with recent trends. The rolling three-month average for multiunit dwellings was showing year-over-year declines of 19% to 20% until September, but suddenly jumped in October, and by November was up 11.4% over the prior year.The sharp rebound in late 2017 puts us at risk of being too pessimistic, but we’re not ready to change our long-term view. Approvals have been over 200,000 for four years running, well above the long-run average and likely owing to a shortage in housing that accumulated after the financial crisis and the sharp rise in Australian population since. But we believe this shortage has largely been addressed, and we anticipate the need for new housing to taper going forward.Recent data on housing turnover, finance commitments, and house prices has anchored our view approvals are set to fall, especially in apartments. The latest figures for the September quarter showed established house sales down 20% from the June quarter and 24% versus the prior year. That was the sharpest year-over-year drop in seven years and the sharpest month-on-month fall since March 2008. That sounds somewhat shrill and it’s important to recognise there have been several double-digit declines in turnover on a quarter-over-quarter basis during this strong bull market in house prices; for example, turnover declined in the first quarter of 2016 when the banking regulator, Australian Prudential Regulation Authority, or APRA, introduced the 10% speed limit on lending to investors, and volumes and prices subsequently rebounded. But the recent sharp drop in turnover is nevertheless a red flag. The December quarter turnover figure will be a very important clue as to whether this was just a pause in the ongoing housing bull market, or if it marks a change in trend.Finance commitments have also slowed as APRA has tightened the screws. Total financing commitments to housing rose by 4.4% in the September quarter over the prior year. While this might seem reasonable, it has slowed from the 9.3% average annual growth in financing that took place over the four years between the start of 2012 and the end of 2015 as home prices and construction boomed.Now, there was a pick up during the September quarter of finance for new purchases and construction, with lending to new construction up 12.5% year over year, indicating there is some steam left in the new construction market. But we are not yet convinced it will see a return to the steady 15% growth of 2014 that drove the apartment approval boom. APRA’s monthly banking statistics show housing loan balances did tick up in October and November, growing 0.46% and 0.54% month over month, respectively (5.6% and 6.6% annualised) after averaging just 0.4% (5% annualised) since July; but we see this as mostly seasonality. The fourth quarter is typically the strongest. Against the prior year, growth in housing loans slowed to 6.3% in November, down from 7.1% growth in 2016 and early 2017. The key message is the data does not suggest a sudden reacceleration in lending.Finally, the Australian Bureau of Statistics', or ABS’, eight capital city weighted average median house price index declined by 0.2% in the September quarter versus the prior quarter. This could prove to be just a blip--there was a similar fall in the first quarter of 2016, when we saw a similar sharp drop in house transfers. But given the drop in turnover and slowdown in financing, it looks like a longer period of weakness is ahead. CoreLogic reports prices were flat in October and November, and declined 0.3% month on month in December.Overall, this confluence of factors makes us think it is premature to be upgrading our expectations for residential approvals in 2018, despite the recent positive news.Analyst: Lincoln Valentine

One Swallow Does Not a Summer Make for Housing, but Spring Has Arrived for Infrastructure Spending